Interactive Investor

ii view: results drive IT firm Kainos to six-month high

Offering both business and geographical diversity, helping customers improve efficiency in tough economic times and with a positive outlook and growing AI expertise. Buy, sell or hold?

20th May 2024 12:36

by Keith Bowman from interactive investor

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Full-year results to 31 March

  • Revenue up 2% to £382 million
  • Adjusted pre-tax profit up 14% to £77 million
  • Cash held up 16% to £126 million
  • Final dividend of 19.1p per share
  • Total dividend for the year up 14% to 27.3p per share

Chief executive Russell Sloan said:

"Our latest results, record our 14th consecutive year of growth with disciplined execution in the current macro-economic climate.   

“We have been focused on our operational performance, maintaining the appropriate balance between growth, international expansion, investment for the future and profitability.”

ii round-up:

IT provider Kainos Group (LSE:KNOS) today detailed growth in annual profits matching prior forecasts, with demand from healthcare customers expected to resume near term and from commercial customers in the medium term.

A 28% increase in sales to install productivity enhancement products from partner Workday Inc Class A (NASDAQ:WDAY) helped annual adjusted pre-tax profits rise 14% to £77 million. Its £10 million investment in artificial intelligence (AI) services now sees over 500 of its more than 2,900 staff trained in the use of Generative AI to assist customers.

Shares in the FTSE 250 company rose as much as 16% in UK trading having come into this latest news down by 5% year-to-date. That’s similar to accountancy software provider Sage Group (The) (LSE:SGE) and below a near 6% improvement for the FTSE 250 index itself during 2024. Kainos shares now trade where they were in November 2023, just before a crash following half-year results.

Kainos works with over 900 private and government run organisations, helping them either transform the delivery of their digital services via enhanced systems, or by consulting and then deploying the products of partner Workday in providing smart audit, HR and planning software to improve efficiency.

Revenues for the Digital Services division fell 5% to £213 million, hindered by an 11% decline in healthcare related sales to £44 million and given the tough comparative of high pandemic related sales the previous year. Commercial sales fell by a fifth to £31 million, hit by project deferrals and lower IT expenditure post the pandemic. 

The launch of an employee document management product through its Workday offering helped fuel customer demand, with the business on track to achieve its target of £100 million annual recurring revenue by 2026. Currently, it's £61 million.  

Overall group revenue rose 2% year-over-year to £382 million. Group cash climbed 16% to £126 million. Its next trading update is scheduled for 2 September. 

ii view:

Founded in 1986, Kainos today operates in 23 countries across Europe, Asia and the Americas. Digital services, ensuring security, accessibility and improved user outcomes make up the biggest slug of sales at 56%, followed by Workday services deploying its products at 29%, and Kainos’s own products complimenting Workday products the balance of 15%. Group customers include the NHS, HM Passport Office, KBC Bank and Royal London Asset Management.  

For investors, the pandemic boost continues to wash through and costs generally for businesses remain elevated. Its partnership with Workday is of high importance, while growing international sales can suffer currency headwinds. 

On the upside, Kainos’s ability to improve other organisation’s efficiency in a tough economic environment remains significant, and investment in its AI offering continues. It enjoys diversity of both underlying customer type and geographical regions, sales overseas rose 13% to £150 million, while cash held of £126 million points to robust finances. 

On balance, and despite ongoing risks, a consist track record of growth and a consensus analyst fair value estimate above £12.75 per share appears to offer grounds for continued longer-term optimism. 

Positives: 

  • Business and customer diversity
  • Growing sales overseas

Negatives:

  • Uncertain economic outlook
  • Corporate spending on IT can be unpredictable

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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